Edited version of private ruling

Authorisation Number: 1011794842273

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Ruling

Subject: Carrying on a business

Question and answer

Are you carrying on a business of buying and selling items over the internet?

No

This ruling applies for the following periods:

Year ended 30 June 2010

Year ending 30 June 2011

The scheme commences on:

1 July 2009

Relevant facts

You are employed full-time.

For the last couple of years, you have been selling items on the internet using an account in your spouse's name.

This activity has generated sales of a value in excess of $X ($US) in the last 12 months.

You have completed a number of sale and buy transactions.

Almost all purchases made through the internet are private in nature.

Your activities on the internet are varied in nature and fall under the following headings:

Selling old household gear for others

You help friends and family to get rid of unwanted private assets. Arrangements differ in that sometimes you sell the items for no charge while at other times you take a percentage of the sale price as a commission. The commission amount is not a set percentage. At times, you will keep a particular item for personal purposes as payment. In the last 12 months, you have sold items to a certain value and have received approximately half of the amount as payment.

Selling old household gear

You sell your own personal unwanted items. If these items were not sold using the internet, you would have sold them by holding a garage sale.

Interesting stuff that you find at garage sales or in classified ads

You go to garage sales and purchase items that you are interested in. You also review classified ads for items to purchase and resell at a profit. At times, you will purchase items that you can resell straight away at a profit on the internet. However, most of the time, you keep the items and if they haven't been used within a couple of months, you will sell them on the internet. Some items are sold at a profit and some at a loss.

Buying bulk loads of gear for personal outdoor activities

You have a personal interest in outdoor activities and regularly try to increase or improve your own gear that you use in these activities. You will buy this type of gear from classified ads in newspapers, through a club or from people you know. You will purchase this these items in 'lots', take what you need and then sell the remaining items. You have made sales on the internet. You would not purchase these items if you did not have a personal interest in these activities.

Selling old stock for a business

A tradesman recently approached you to sell some old stock and consumables. You will be doing more of this type of sales in the future. You charged him a commission.

You do not advertise.

People contact you to sell items for them, that is, friends and family.

The time spent doing your the internet trading differs from week to week and month to month, which is approximately X hours a week in a good week. For a period of some months, you did not undertake any the internet activities due to other priorities.

You do not expect that your sales volume will change much in the future.

You do not have a business name or an Australian Business Number.

You sometimes keep diary entries relating to some items you purchase for resale. However, most of the time, you sell private assets so you have not kept any records of acquisition of these items.

You do not have a business plan.

You do not have any projections or formal documents relating to the future profitability of your activities.

If you introduce costs such as motor vehicle expenses, home office expenses into your calculations, it is likely that you activities would return a loss or possibly a very small profit.

You do not have any financial statements for any period you have been conducting your internet activities.

Your total sales in the past 12 months was approximately $X ($US).

You have no formal qualifications relating to the items you select for purchase and resale.

You have no set formula for commissions. At times, you have taken an item from those given to you to sell as payment.

The provided a list of expenses incurred in undertaking your the internet activities.

Reasons for Decision

Assessable income

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes all income derived directly or indirectly from all sources whether in or out of Australia, during the income year.

Deductibility of expenses

Under section 8-1 of the ITAA 1997, for an expense to be an allowable deduction it must, either, be incurred in gaining or producing assessable income, or be necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income.

You cannot deduct an expense under section 8-1 of the ITAA 1997 if it is of a capital, private or domestic nature. You also cannot claim a deduction if the expense is incurred in producing exempt income or a provision of the Act prevents you from claiming a deduction.

Carrying on a business

Section 995-1 of the ITAA 1997 defines 'business' as 'including any profession, trade, employment, vocation or calling, but does not include occupation as an employee'.

The question of whether a business is being carried on is a question of fact and degree. The courts have developed a series of indicators that are applied to determine the matter on the particular facts.

Taxation Ruling TR 97/11 provides factors, established by the Courts, that would need to be satisfied in order to be considered to be carrying on a business. It should be noted that TR 97/11 specifically deals with the carrying on of a business of primary production, but the criteria established can be applied to most activities.

The relevant factors include, but are not limited to:

(a) Whether the activity has a significant commercial purpose or character

(b) Whether the taxpayer has more than just an intention to engage in business

(c) Whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity

(d) Whether there is repetition and regularity of the activity

(e) Whether the activity is of the same kind, and carried on in a similar manner, to that of the ordinary trade in that line of business

(f) Whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit

(g) The size, scale and permanency of the activity, and

(h) Whether the activity is better described as a hobby, a form of recreation or a sporting activity.

No one indicator is decisive and there is often a significant overlap of these indicators. The indicators must be considered in combination and as a whole. Whether a business is being carried on depends on the 'large or general impression gained from looking at all the indicators, and whether these factors provide the operations with a 'commercial flavour' (Ferguson v. FC of T (1979) 37 FLR 310 at 325; 79 ATC 4261 at 4271; (1979) 9 ATR 873 at 884). The weighting to be given to each indicator may vary from case to case.

A business is characteristically carried on in a systematic and organised manner rather than on an ad hoc basis. An activity should generally conform with ordinary commercial principles to amount to the carrying on of a business.

If the activity is more properly described as the pursuit of a hobby, recreation or sport then it will not be regarded as a business even where the operation is substantial (Ferguson v. FC of T 79 ATC 4261; 9 ATR 873). This is not to say that an activity characterised as a hobby can never become a business. The matter will always depend on the facts and a weighing of the indicators.

Application to your circumstances

It is noted that you have been carrying on your internet activities for a couple of years and also that for a period of approximately you completed a number of buy and sell transactions. However, these transactions include items that were purchased and sold for your own personal purposes. Some of the items were purchased due to you having a personal interest in the particular items.

The selling of your personal items and those items belonging to friends and family has limited commercial character or purpose. You do not have a business plan or keep records of your transactions. You have not got any financial statements for any period during which you have been conducting your internet activities. You do not have a set formula for calculating payment for your services and at times you retain an item from family and friends for your own personal use in lieu of payment. The amount of time spent on your internet activities each week is limited. This is indicative that your activities are not carried out in a businesslike manner and directed at making a profit.

Based on the information you have provided, we do not consider that the activity has the necessary characteristics of a business for taxation purposes. Your internet activities can be said to be more akin to that of a hobby or pastime undertaken mainly to sell and purchase items for yourself, family and friends.

Therefore, any income you receive in relation to this activity will not be assessable under section 6-5 of the ITAA 1997. In addition, any expenses that you incur in relation to this activity will not be deductible.